How many of us can really tell which is best between a 30 year fixed mortgage rate or a 15 year fixed mortgage rate….
Many times we fix our eyes upon something that we really wish to possess but we can not own it due to lack of enough resources. What if you really want to possess but unluckily do not have hard cash, the last resort left would be buying it on credit.
In order to use a line of credit which is easy on the pocket, you will have many alternatives available regarding which lender to approach. For example there is this first lender who is offering an iPad that will allow you to pay $200 per month over a period of 3 months and the total would be $600 of which $100 is interest. Still wanting to try another alternative, you approach the second lender whose offer allows you to pay $125 monthly for 6 months and the total would be $750 of which $250 is interest. Now out of both the deals the second one demands a lesser payment per month the tenure is longer to have possession. You will also end up paying more than the actual price.
Similarly while deciding between a 15-year mortgage and a 30 year mortgage for a home, you would be facing the same situation, therefore be clear in your mind and consider all the advantages and disadvantages prior to making a decision.
When you buy a home you get a mortgage loan that’s paid back over 15 or 30 years. Thirty-year loans are popular because:
- The monthly payments are lower than with 15-year loans.
- You can qualify for a bigger loan (i.e., a more expensive house) than with a 15-year loan.
- Sometimes that’s all you can get. (You might not qualify for a 15-year loan.)
The downsides of 30-year loans compared to 15-year loans are that you have to make monthly payments for an extra15 years, and you’ll pay a lot more total interest over the life of the loan.
Which Loan Would You Choose?
Pros in choosing a 30 year mortgage over a 15 year mortgage
It is observed that a 30 year mortgage is generally preferred by homebuyers reason being that they assume that a higher monthly payment is not economically possible. For example… a house that cost $300,000 would allow you to pay $1900 per month with a fixed rate of interest at 6.5%. You would end up paying a total of $682,633 that is twice the price of the house ($300,000 as principal and $382,633 interest). Whereas, with a 15-year fixed rate mortgage at 6.0%, your monthly payment would be about $2,532. However, at the end of 15 years, you will have spent only $455,682. ($300,000 principal and only $155,682 interest). That’s $226,951 less than with the 30-year mortgage!
What could you do with an extra $226,951?
The money thus saved could be invested in buying a car, renovating the house etc. Moreover, owning your own home paying additional money per month in a shorter tenure is worth the effort.
Cons in choosing 15 year mortgage rate over a 30 year mortgage
However, being too enthusiastic in paying your home mortgage has its drawbacks as well.
One shortcoming is that the monthly payment is higher which means you will have to ignore your spending desires. Moreover by paying less interest, you’ll get less of a tax deduction.
While it seems exciting to pay off your home loan in 15 years it is a wild dream for many. With such a rise in global inflation and increase in demands, it becomes almost close to impossible for an average borrower to spare out additional money from his daily routine utilities.
One greatest benefit is paying off the mortgage sooner while not being bound to pay a higher monthly payment in case there might arise an unexpected cash need later on in life. This is one of the steps that is emphasized the most as there’s a lot of value in flexibility and leaving your options open.